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Net property borrowing falls further

Homeowners’ equity increases (but only because they are paying down debt)

UK homeowners repaid a record £7 billion in the final quarter of 2010 according to figures released today by the Bank of England. This is the eleventh quarter in a row that net property debts have decreased and the highest net repayment since records began in 1970.

It is likely that the reduction in debt is a result of more stringent lending policies by lenders who have been shaken by the banking meltdown in recent years. In addition a number of secured lenders have pulled out of the market all together as house prices have plummeted, wiping out equity a d leaving many homeowners (and lenders) highly geared and dangerously exposed.

It seems clear that lax lending policies had a direct and devastating impact on the financial markets and the previous unsustainably high levels of lending have now been scaled back. But it also appears that consumers are not in a position to increase borrowing in order to take advantage of the lowest base rates in 315 years, which is an ominous development for high street spending and house prices in the coming months.

The challenge for banks is to ensure that the pendulum does not swing too far the other way, denying sensible levels of credit to responsible borrowers. A competitive market for sensible levels of credit is essential in a fully functioning free market economy, fostering enterprise and wealth creation. But anecdotal evidence suggests that the over-correction is in full swing.